· The OECD policies referred to above, directed at lowering statutory marginal rates, have been advocated using the rhetoric of the Simple View even though economic advisers often are aware of the Complex View.
· If one would really think that high marginal rates reduce work effort and supply, then a situation of high unemployment would call for higher rates - that would reduce unemployment. Policy however has been to reduce rates.
Secondly, when these views are confronted with the effects of the policy of rate reduction, there again is ample scope for confusion.
When unemployment has been reduced, then this is being seen as corroboration of the Simple View. For example the data on the US now show the combination of a reduction of taxes on higher incomes and some reduction of unemployment, and it will now be difficult for policy makers to accept other lines of arguments. Actually, in so far as there has been some success in practice, it is because the policies have also lowered average rates. Higher budget deficits have been relied on to pay for additional benefits and average rate reductions for higher incomes. The reduction of marginal rates actually had a negative impact.
In most cases unemployment has remained high. In this case one should expect that policy makers would reconsider their views. They don’t seem to do this, and rather look at the few cases where there seems to have been success along the expected pattern.
A specific example is the Dutch 1990 tax reform (known as “Oort reform” [78]). This reform was supported by computations using the MIMIC model, see Gelauff (1992). The reform reduced both marginal rates and exemption. The reduction of statutory marginal rates reduced Phillips curve sensitivities, and induced larger wage claims and lower employment. The reform however also included a reduction of average taxes, and this caused employment to rise on balance. We may restate the situation in more mundane terms: the reduction of average taxes was sold on the political market as a reduction of marginal rates. Politicians had their eyes fixed on the reduction of marginal rates and the reduction of unemployment, and they got what they wanted to see, without realising that the mechanism in MIMIC was entirely different, and that proper exploitation of this mechanism would lead to even lower unemployment.
26. Heterogeneous labour
We will first discuss heterogeneous labour supply, and forward a hypothesis on its distribution. Note that supply is difficult to observe, since generally we only observe actual employment, which is the minimum of supply and demand. However, data on actual earnings do allow the encouraging conclusion that the earnings distribution can be approximated by a lognormal distribution. For an indication we look at Dutch data on the distribution of income in 1950 and 1988. We complete this chapter by a more thorough sets of definitions for earnings, cost and income accounting, and we construct integrals that are relevant for the minimum wage.
Dromedary supply
Let us first regard labour supply.